(Article from Insurance Law Alert, October 2017)
For more information, please visit the Insurance Law Alert Resource Center.
The Second Circuit ruled that under Nevada law, an insured v. insured exclusion bars coverage for a suit brought by a former director regardless of whether the suit was brought in an individual or fiduciary capacity. Intelligent Digital Systems, LLC v. Beazley Ins. Co., Inc., 2017 WL 4127540 (2d Cir. Sept. 19, 2017).
Jay Russ sold his technology company to Visual Management Systems (“VMS”). As part of the transaction, VMS agreed to add Russ to its Board of Directors. After the transaction closed, Russ attended three board meetings and was paid for his board member services. Several months later, Russ resigned and threatened suit against VMS based on certain alleged payment deficiencies from the sale of his company. The parties reached an agreement, pursuant to which the VMS directors assigned their rights under a D&O policy to Russ. Thereafter, Russ sued Beazley, VMS’s D&O insurer, seeking indemnification for the underlying settlement amounts. Beazley denied coverage based on an insured v. insured exclusion. A New York district court denied the parties’ cross-motions for summary judgment, finding that issues of fact existed as to whether Russ was “duly elected” to the Board of Directors. A jury subsequently found that Russ had been a duly elected director within the meaning of the exclusion and, therefore, that there was no coverage under the policy. The Second Circuit affirmed.
The Second Circuit ruled that the insured v. insured exclusion, which bars coverage for “any Claim . . . by, on behalf of, or at the direction of any of the Insureds,” is unambiguous and applies to any claim by a director, regardless of the capacity in which the director brings suit. The court further held that Russ was “duly elected” as a director within the meaning of the policy (disagreeing with the district court’s ruling that the bylaws of the company created ambiguity as to whether Russ was “duly elected”). Finally, the Second Circuit held that even assuming the bylaws were ambiguous, the jury finding that Russ was “duly elected” was well supported by the evidence.